The law of diminishing marginal utility is an important and fundamental law of consumption. It is based on common and fundamental human experience. The law says that, the marginal utility of a good diminishes as an individual consumes more units of a good, the extra utility or satisfaction that he derives from an extra unit of the good goes on falling.
It should be carefully noted that it is the marginal utility and not the total utility that declines with the increase in the consumption of a good. The law of diminishing marginal utility means that the total utility increases but at a diminishing rate.
Marshall who was the famous exponent of the marginal utility analysis has stated the law of diminishing marginal utility as follows:
“The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has.”
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This law is based upon two important facts. Firstly, while the total wants of a man are virtually unlimited, each single want is satiable. Therefore, as an individual consumes more and more units of a good, intensity of his want for the good goes on falling and a point is reached where the individual no longer wants any more units of the good.
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That is when saturation point is reached; marginal utility of a good becomes zero. The second fact on which the law of diminishing marginal utility is based is that the different goods are not perfect substitutes for each other in the satisfaction of various particular wants.
It is obvious from above that the law of diminishing marginal utility describes a familiar and fundamental tendency of human nature. This law has been arrived at by introspection and by observing how people behave.